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So Moody’s has decided on Monday
night to downgrade France’s AAA rating. This comes as no surprise,
since the agency had already announced that the rating was under surveillance.
It is following in the footsteps of Standard & Poor’s, almost a
year later, which had downgraded France’s rating in January 2012. Fitch
remains the sole agency with a rating of AAA for France’s bonds. As
long as two of the three agencies were still rating France worthy of the
highest rating, France was de facto considered AAA by the investors. But from
now on, this is no more the case. The downgrade from the highest level is
real, and it will certainly mean the end of these interest rates.

There are already a number of regular
clients who will stop buying France’s bonds, in particular those who,
by statutory obligations, can only acquire financial assets that have the
best possible ratings. In essence, those are the pension funds, because they
have to provide retirement on the long term and are not allowed to take on
any risk. Also, banks owning France’s bonds in their accounts
didn’t have, up to now, to hedge them because they were considered 100%
safe. But it is not the case anymore : the bonds being now considered a
little more risky, banks have to put aside some liquidities to cover that
risk, in conformity with the Basel II, and soon Basel III, rules. And
freezing cash always represents costs, so France’s debt will be less
appealing.

There is another element we have to take
into account : the european help funds are noted AAA because they are, to a
great extent, guaranteed by Germany and France. France’s downgrade is
likely to affect those funds, meaning that the whole buidup of bailout plans
for the endebted countries will become more fragile and costlier. The FESF,
actually, just cancelled an issuing of funds.

Beyond these mechanical effects, global
worries will grow. Just one week after The Economist published a special
piece on France,
a time Bomb at the Heart of Europe, Moody’s downgrade acts as a
severe confirmation. A core country of the Eurozone, between the virtuous
North, close to a balanced budget, and the lazy or laxist South, France is
looking less and less like the former and more and more like the latter.

A French debt crisis would jeopardize all
of the Eurozone. And we arrive at this conclusion for a very simple reason :
all of the governments are just showing themselves incapable of really
tackling the problems, making structural reforms and reducing public
spending. By patching things here and there with budget tricks, they were
able to maintain the illusion, but now it’s over. Up to now, the slide
down was a progressive one... it should be accelerating now.

Philippe Herlin is a researcher in finance and a junior lecturer at the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers of the Austrian School of Economics, he brings his own views on the actual crisis, the Eurozone, the public debts and the banking system. He is also contributor at www.Goldbroker.com